Bitwise: Why should traditional investors pay attention to stablecoins?

Original title: Could Stablecoins Put an End to Money Market Accounts?

Original article by Juan Leon and Ari Bookman, Bitwise

Original translation: Luffy, Foresight News

The Bitwise Research team publishes a Crypto Market Review every quarter, analyzing the most important fundamentals and trends affecting the crypto market based on data. The third quarters market review was very exciting.

On one hand, cryptocurrency prices are showing no signs of improvement, with the market moving sideways as it has for much of the past six months.

But on the other hand, as Bitwise Chief Investment Officer Matt Hougan said, The calm on the surface masks tremendous progress behind it.

We want to highlight just one aspect of these developments: stablecoins becoming a dominant application of crypto technology.

Why should investors pay attention to stablecoins?

Stablecoins are no longer niche, we’ve been talking about them for years. Traditional big companies like PayPal are launching their own stablecoins. Stablecoins are being discussed at the top level of the U.S. House of Representatives and Senate. Last week, payment processing giant Stripe announced that it is planning to acquire stablecoin issuance platform Bridge for $1 billion, its largest acquisition ever in the cryptocurrency sector.

So what makes stablecoins so valuable, and why should investors care about them?

Stablecoins are different from other crypto assets in that they are designed to maintain a stable value relative to some asset (usually the US dollar). If you see the price of a stablecoin fluctuate, something must have gone wrong. This makes them less attractive as an investment target and more as a medium of exchange. More importantly, this role makes stablecoins a bridge between traditional finance and the crypto economy.

Not only that, they are fast, efficient, and programmable. You can send $10,000 to anyone in the world in seconds without having to worry about banking hours or long settlement times. As digital assets, stablecoins can be programmed to execute smart contracts, enabling automated payments, escrow services, and a variety of decentralized finance (DeFi) applications.

That’s why stablecoin usage has surged to record levels. In the first half of this year, more than $5.1 trillion in transactions were conducted globally via stablecoins, which is not far behind Visa’s $6.5 trillion.

Stablecoin transactions, source: Bitwise Asset Management, Coin Metrics. Data range from Q1 2020 to Q3 2024. Note: “Others” include BUSD, DAI, FDUSD, GUSD, HUSD, LUSD, PYUSD, TUSD, USDK and USDP.

How did stablecoins take off?

Why did the traditional payment giant PayPal launch a stablecoin? The answer is that this business model is too good.

Issuers take in dollars (or other fiat currencies) and issue an equal amount of stablecoins. They then use these fiat currencies to buy U.S. Treasuries and other yield-earning assets. They pocket the interest.

How well does this work? Tether, the largest stablecoin issuer, made more profit than BlackRock last year.

These issuers are becoming big players. As shown in the figure below, the total amount of U.S. Treasuries held by the top five stablecoins exceeds that of some G20 countries such as South Korea and Germany. Therefore, the growth of stablecoins provides a new source of demand for U.S. debt and helps provide liquidity to the U.S. Treasury market. Stablecoins are good for the broader financial system.

Investors can’t wait to get in on the action. Tether’s biggest competitor, Circle, is happy to oblige, quietly filing for an IPO this year. In addition, public companies like Visa are already planning to integrate stablecoins into their operations.

Stablecoins and major foreign holders of U.S. Treasuries, based on data from the U.S. Treasury Department and company reports. Data as of June 30, 2024.

What opportunities should investors seize?

So how can investors seize this opportunity?

Remember: stablecoins don’t appreciate in value, and they are subject to the same inflationary pressures (and currency conversion risks) as the assets they are pegged to.

So what opportunities should investors look for, and what risks should they be wary of?

1) Listed companies

Some multinational companies are integrating stablecoins into their businesses to gain a competitive advantage. These companies are reflected in cryptocurrency stock indices, such as the Bitwise Crypto Innovators 30 Index. Since stablecoins offer lower transaction costs and faster settlement times than traditional transaction intermediaries, we expect that companies such as Visa and PayPal will not be the last to deploy stablecoins, and more banks and payment processors are expected to enter this field.

2) Potential Alternatives to Money Market Accounts

For most stablecoin holders today, their stablecoins are similar to cash in a checking account: they earn no interest. But what if issuers could earn some of the profits they make from treasury reserves as interest?

If this path is opened, stablecoins will become an attractive alternative to money market funds, a $6.3 trillion industry. For advisors whose clients have cash on hand, stablecoins could become a useful tool in a portfolio. This is worth watching as stablecoin regulation is a hot topic in the U.S. Congress.

3) Value accumulation of the underlying blockchain

Most stablecoin activity occurs on Ethereum. The growth of stablecoins directly drives the growth of the network and indirectly drives the price of ETH. Of course, the reverse is also true: if a stablecoin fails, it can put pressure on network activity.

Final Thoughts

How big can stablecoins be? Imagine:

Total liquid deposits in the U.S. are about $18 trillion. Currently stablecoins only account for 1% of that market size. If we see large-scale interest-bearing stablecoins approved or a clearer regulatory framework in place, what will happen to relative market share?

For investors, the signal is clear: now is the time to pay attention to stablecoins.

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